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GM Agrees to Sell 51% of Finance Unit

Investors led by a hedge fund would pay the troubled automaker $14billion for GMAC.

April 04, 2006|David Streitfeld | Times Staff Writer

General Motors Corp. agreed Monday to sell a majority share of its credit arm for $14 billion, a defensive move that analysts said would fund employee buyouts and help the beleaguered automaker's balance sheet.

Although GM would gain some much needed cash, it also would give up control of its only profitable division.

"This is about restructuring our business so we can be robustly profitable in the future, so we're not so balanced on a razor's edge," GM Chairman and Chief Executive Rick Wagoner said at a news conference.

Cerberus Capital Management, a hedge fund, leads the investor group that would buy 51% of General Motors Acceptance Corp. The group includes Citigroup Inc.

Analysts were generally supportive of the deal -- the automaker put GMAC up for sale last fall -- but the stock market wasn't enthusiastic. GM's shares fell $1.13, or 5.3%, to $20.14.

"The patient is definitely looking a little better, but he's not out of intensive care yet," said Shelly Lombard, auto industry analyst with GimmeCredit, a New York-based corporate bond research firm.

GM, which had a loss of $10.6 billion last year and continues to lose sales to Toyota Motor Corp. and other Asian rivals, plans to close a dozen plants and cut 30,000 hourly jobs in the U.S. in the next three years. To accelerate the cutbacks, last month GM offered buyouts to 113,000 of its hourly workers.

GM's fortunes also are tied to Delphi Corp., its primary supplier of parts and a former unit of GM. Delphi has asked a U.S. Bankruptcy Court to void its union contracts and the United Auto Workers has threatened to strike if the judge does away with the current labor agreement. A strike at Delphi would probably force GM to shut its factories, analysts have said.

GMAC, which finances the purchase of houses as well as cars, brought in a much-needed $2.4 billion in profit to GM last year, while the auto unit lost $12.9 billion. But with GM's future continually in question, management felt it had little choice but to put the subsidiary up for bid.

One goal of the sale was to get GMAC a credit rating that was higher than GM's junk level, but that doesn't seem imminent. Both Standard & Poor's and Moody's said Monday that GMAC's rating would remain below investment grade.

The rating companies had been hoping the buyer of the majority stake would be a financial institution that would run GMAC as a business, rather than a more passive private equity group, Lombard said. Without an investment-grade rating, it will be more difficult for GMAC to borrow money.

Cerberus, a $16-billion hedge fund founded in 1992, is a turn-around specialist named after the mythical dog that guarded the entrance to the underworld.

Under the terms of the deal, GM will get approximately $10 billion when the transaction closes, probably in the fourth quarter, plus $4 billion over the next three years.

Wagoner said the money would be used to support the company's turnaround plans and strengthen its balance sheet.

This wouldn't be the first time GM has sold valuable assets, including Electronic Data Systems in 1996 and Hughes Electronics in 1997, to fund its auto business, Morgan Stanley analyst Jonathan Steinmetz said in a research note.

GM management has not explained "why this time will be different," Steinmetz said.

Taking a more optimistic view was David Healy of Burnham Securities: "[GM] wouldn't be selling off half the crown jewels if they weren't in trouble, but I think they struck a pretty good deal today."

One reason for the dismal performance of GM's stock Monday may have been some other news announced by the company: its U.S. vehicle sales tumbled 14.6% in March from a year earlier. Ford Motor Co.'s sales also fell 4.6%, but Toyota's rose 6.9%.

GM said its March sales were not as bad as they looked, because the 2005 period featured extensive sales incentives.

"Baloney," responded Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pa. GM "may have reduced incentives last year, but this year they reduced vehicle sticker prices so they would appear more competitive. Whether you lower the price by incentives or an absolute cut doesn't really matter."

Making cars is an economy-of-scale business, Egan said. "GM is losing sales, losing the economy of scale, and slipping further behind. Every other week the company is faced with a crisis. Next: more of the same."

The long-running crisis has led to intense speculation that Wagoner's job might be imperiled.

George Fisher, presiding director of the GM board, said Monday that "while there is still much work to be done, the GM board has great confidence in Rick Wagoner."

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